Saturday, September 30, 2017

These expedient fixes end up crippling the mechanisms that are needed to actually solve the systemic sources of the crisis.

We can add a third certainty to the two standard ones (death and taxes):The rules will suddenly change when a financial crisis strikes.

Why is this a certainty? The answer is complex, as it draws on human nature, politics and the structure of societies/economies ruled by centralized states (governments).

The Core Imperative of the State: Expand Control

As I explain in my book, Resistance, Revolution, Liberation, the core (i.e. ontological) imperative of every central state is to expand its reach and control. This isn’t just the result of individuals within the state seeking more power; every centralized state views whatever is outside its control as a threat. The way to reduce or neutralize a threat is to take control of the mechanisms that generated it.

Once the state has gained control of these mechanisms, it is loath to relinquish them; to relinquish control is to invite chaos.

There is of course an intensely self-serving dynamic to extending state control: those being paid to enforce this state control have an immense vested interest in the state retaining (or even extending) this control, as their livelihoods now depend on the state doing so.

The higher-ups in the state also have a vested interest in retaining these new controls, as more control means more wealth and power accrue to those at the top of the centralized power pyramid: this extension of state control means private enterprise must now lobby the state for favors, and it gives the higher-ups more perquisites and favors to dispense—for a price, of course.

This vested interest arises throughout the power pyramid, from the bottom functionary with newfound power over common citizens to the managers of the departmental bureaucracy tasked with enforcing the new control to the apex of state authority.

This hierarchy of state power creates another threat to the central state; the corralling of state power by fiefdoms within the state itself. In other words, fiefdoms can become semi-autonomous agencies that are only nominally under the control of central authority. The answer is of course additional layers of oversight, compliance, investigation and enforcement within the state itself.

The State Serves Elites First and Foremost

Though modern states always claim to serve the common citizenry, in reality the state serves the wealth/power elites who need state complicity to maintain their wealth/power. These power elites function as the modern-day equivalent of aristocracy: everyone is equal, but some or more equal than others, to use Orwell’s timeless phrase.

This reality leads to a non-formalized two-tier system: one for commoners and one for the power elite/New Aristocracy. A formalized two-tier system would incite political disorder, so the system is nominally “everyone is equal under the law” but in practice there are two tiers.

Tax collection is a good example. The corporate/financier power elite have access to complex tax avoidance schemes that are unavailable to commoners, who have few tax reduction tools. The judicial system is another: power elites can play the system via high-cost attorneys while commoners are left to plea-bargain a reduced sentence, even when they are innocent.

When crises arise, the state first protects its own authority and control. Its second priority is securing the wealth and power of the elite.

The Self-Serving Savior State

Human nature being what it is, there are two motivations for state authorities to expand their reach and control. Some of those with state authority feel it is their prerogative (or even their responsibility) to expand state control to protect the commoners who are likely to suffer should a crisis erupt. This do-good impulse may be genuine in some, but by and large it is not compassion that dominates decision-making but the dynamic of a central state having so much power in the first place: you have the power, so do something to save us from the consequences of crisis.

In other words, once power is concentrated in the hands of a few, those few are responsible for handling crises that would have otherwise fallen on a decentralized system with many levels of response.

Then there is the Machiavellian impulse to use crisis as the cover for a power-grab, a dynamic encapsulated in the phrase, never let a good crisis go to waste. This dynamic doesn’t have to be passive; power elites don’t have to wait for a crisis, they can engineer one by exploiting their control of state and private-sector mechanisms. This process of engineering a crisis can be policy-driven (as described in Naomi Klein’s book The Shock Doctrine) or propaganda-driven (the sinking of the battleship Maine, Nazi Germany’s Lebensraum, etc.).

Though many call an expansive state The Nanny State, I prefer the term The Savior State, as the state claims its expanding powers under the guise of saving us from a variety of threats—including those that arise from the socio-economic system the state oversees. In other words, The Savior State’s guiding ideology is tosave us from ourselves.

If we might harm ourselves with addictive drugs, the state’s solution is to imprison everyone caught with addictive drugs—except of course those addictive drugs that enrich the Power Elites (nicotine, alcohol, synthetic opioids, etc.).

If the state deems it risky for children under the age of ten to play outside unattended, the state’s solution is to treat the parents/guardians as criminals.

Each extension of control creates new layers of vested interests—more functionaries who gain not from solving problems but insuring they fester into the future as a form of guaranteed employment, and more opportunities to dispense favors in the informal two-tier system of powerless commoners and influential elites.

The Crisis Toolbox: Political Expediency

History teaches us that authorities view crises as first and foremost a threat to state authority, secondarily as a threat to elites’ wealth and power, and then lastly as a threat to the socio-economic system they rule.

Given these crisis management priorities, their first response is to extend their authority by whatever means are necessary. Once these new powers are in hand, the state deploys them to limit the threat posed to the power elites and the structure that supports state and elite wealth/power.

In a centralized power structure, this crisis management manifests as change the rules without warningto increase the reach and power of the state. The justification is something along the lines of these emergency powers are needed to protect the nation—powers that all too often become permanent, as powers once taken are rarely relinquished for all the reasons outlined above.

While the rule changes are presented as both necessary and well-planned, in actuality the process is one of political expediency: a hurried rush to do whatever limits the risks to the power elites’ wealth and power before opposition can be organized, and to cloak the power-grab in the usual Savior State garb: we are acting to save the system that benefits you.

But this expediency comes back to haunt both the state and the power elites, as expedient power grabs designed to protect the state and elites do not actually address the dynamics that spawned the crisis in the first place. Rather, they exacerbate the problem by introducing self-serving fixes that paper over the problem as a quick-and-dirty way of protecting the power and wealth of the state and private-sector elites.

These fixes end up crippling the mechanisms that are needed to actually solve the systemic sources of the crisis.

The Continuing Financial Crisis

Financial crises are inevitable, and the state (which includes the central bank) seeks to limit the crisis by taking control of the market. Examples include: closing the stock market, declaring a bank holiday, issuing a new currency, fixing wages and prices, and banning short selling.

In the current financial crisis that started in 2008 (and that has yet to end), central banks and states have largely avoided these outright takeovers of the market in favor of a more subtle strategy of controlling the markets while maintaining the appearance of “free markets.”

In Part 2: How To Defend Against An Unfair Re-Set Of The System, we’ll examine the ways the U.S. state and central bank have already extended control over the market—for example, via the mass purchase of assets by central banks (see accompanying chart)-- and what additional controls they will likely impose as the simmering crisis erupts anew in the years ahead.

We’ll also look at what we mere commoners can do to protect ourselves from the inevitable risks and unanticipated calamities this centralized control will unleash.

Thursday, September 28, 2017

Although our leadership is too polite to say it out loud, they've embraced stagnation as the new quasi-official policy. The reason is tragi-comically obvious: any real reform would threaten the income streams gushing into untouchably powerful self-serving elites and fiefdoms.

In our pay-to-play centralized form of governance, any reform that threatens the skims, privileges and perquisites of existing elites and fiefdoms is immediately squashed, co-opted or watered down.

So the power structure of the status quo has embraced stagnation as a comfortable (except to those on the margins) and controllable descent that avoids the unpleasantness and uncertainty of crisis. We all know that humans quickly habituate to gradual changes in circumstances, and that if the changes are gradual enough, we have difficulty even noticing the erosion.

So wages/salaries stagnate, inflation eats away at the purchasing power of our net income, junk fees, tolls and taxes notch higher by increments too modest to trigger protest, fundamental civil liberties are chipped away one small piece at a time, healthcare costs rise every year like clockwork, and the gap between the bottom 95% and the top 5% widens, as does the gap between the top .1% and the bottom 99.9%, productivity stagnates, the growth rate of new businesses stagnates, but it's all so gradual that we no longer notice except to sigh in resignation.

Japan is a global leader is how to gracefully manage stagnation. Here's how Japan is managing to maintain a comfortable secular stagnation:

Japan's central bank creates a ton of new currency every year, which it uses to buy Japan's government debt/bonds. This keeps interest rates near-zero, so the cost of government borrowing is kept minimal.

This also gives the government a ton of new cash to spend that it doesn't have to raise from additional taxes. The government then spends this "nearly free" money (i.e. deficit spending) to keep the whole stagnating machine glued together.

To keep asset prices comfortably elevated, Japan's central bank creates additional gobs of currency out of thin air every year to buy assets such as stocks and corporate bonds.

It helps if domestic and global investors are willing to buy bonds yielding near-zero, but if not, no problem, the central bank can just create another trillion of new currency and buy all newly issued government bonds. What's another trillion between friends?

There are only two potential spots of bother in this comfy setup:

1. If all this new currency is no longer accepted as having much purchasing power by the rest of the world

2. Inflation arises despite the tender machinations of the central bank and government.

Here are some snapshots of secular stagnation in the U.S.: here's productivity:

Wednesday, September 27, 2017

There is nothing inevitable about such vast, fast-rising income-wealth inequality; it is the only possible output of our financial and pay-to-play political system.

One chart defines the 21st century economy and thus its socio-political system: the chart of soaring wealth/income inequality. This chart doesn't show a modest widening in the gap between the super-wealthy (top 1/10th of 1%) and everyone else: there is a veritable Grand Canyon between the super-wealthy and everyone else, a gap that is recent in origin.

Notice that the majority of all income growth now accrues to the the very apex of the wealth-power pyramid. This is not mere chance, it is the only possible output of our financial system. This is stunning indictment of our socio-political system, for this sort of fast-increasing concentration of income, wealth and power in the hands of the very few at the top can only occur in a financial-political system which is optimized to concentrate income, wealth and power at the top of the apex.

Well-meaning conventional economists have identified a number of structural causes of rising wealth/income inequality, dynamics that I've often discussed here over the past decade:

2. A winner-takes-most power law distribution of the gains reaped from new technologies and markets

3. A widening mismatch between the skills of the workforce and the needs of a rapidly changing economy

4. The concentration of capital gains in assets such as high-end real estate, stocks and bonds that are owned almost exclusively by the top 10% of households

5. The long-term stagnation productivity

6. The secular decline in the percentage of the economy that flows to wages and salaries

While each of these is real, the elephant in the room few are willing to mention much less discuss is financialization, the siphoning off of most of the economy's gains by those few with the power to borrow and leverage vast sums of capital to buy income streams--a dynamic that greatly enriches the rentier class which has unique access to central bank and private-sector bank credit and leverage.

Apologists seek to explain away this soaring concentration of wealth as the inevitable result of some secular trend that we're powerless to rein in, as if the process that drives this concentration of wealth and power wasn't political and financial.

There is nothing inevitable about such vast, fast-rising income-wealth inequality; it is the only possible output of our financial and pay-to-play political system.

Policy tweaks such as tax reform are mere public relations ploys. The cancer eating away at our economy and society arises from the Federal Reserve and the structure of our financial system, and the the degradation of our representative democracy into a pay-to-play auction to the highest bidder.

Tuesday, September 26, 2017

The answer is not another $1 trillion in student loan debt to pay for another raft of declining-value credentials.

So let's say we want to set up a system to help students choose a career that fits their aptitudes and interests. What would we do? How about:

1. Give them zero (or superficial) aptitude and career-related tests.

2. Provide a few minutes with a counselor who knows nothing about them, their aptitudes or potential career-related interests.

3. Design the high school education system to provide near-zero knowledge of finance, debt, economics, how the economy functions and what the world of work demands of workers.

4. Denigrate (subtly or directly) non-college career options, channeling those who aren't sure into 4-year colleges, higher education paid with student loans designed to maximize profiteering.

5. Force them to choose a major or field of study at 17 or 18 years of age, despite their lack of real-world experience and objective knowledge of how the economy functions and their own aptitudes/character traits.

6. Disconnect this higher education from real-world work places so they exit higher education with little actual knowledge of the skills employers need.

7. When the student graduates after borrowing a fortune and discovers their diploma has low value in the marketplace or is in a field they've found they loathe, then suggest the "solution" is to borrow another fortune and invest more years in obtaining another credential.

This is the American education-career maze--ineffective, self-defeating, wasteful, irrational, and apparently designed to maximize student confusion, poor choices and profiteering by higher education and the student-loan racketeers.

As if this wasn't bad enough, what do we decide to teach our students if careers might be significantly different in 10 or 20 years? Yes, math, the basics of science and communication skills will remain useful as a foundation, but these basics aren't enough to prepare students for a fast-changing emerging economy/4th Industrial Revolution.

Clearly, it would be enormously beneficial to teach the skills needed to learn on one's own and adapt successfully to changing circumstances. The current system is a hierarchy of credentialing that enriches those dispensing and funding the credentialing.

Our system's response to those left behind, those with inadequate skills and those who chose unwisely is always: get another credential, at enormous expense. Nobody tells students that credentials are in over-supply and are therefore losing their value.

Value and profits flow to what's scarce and in demand. Trying to reach the top of the credential pyramid is a crowded race, and the losers are left with debt and wasted years they could have spent actually learning useful knowledge bases and skills--in effect, pursuing a self-directed path of accrediting yourself.

The education-career maze doesn't have to be so self-defeating, costly, convoluted or ineffective. My book The Nearly Free University and the Emerging Economy lays out a model of higher education based on workplace apprenticeships in all fields, from carpentry to chemistry to sociology, from Day One, a structure that dramatically lowers costs while providing an education based on real-world acquisition and use of knowledge and skills in the workplace, not sitting in a chair watching a lecture.

What's the emerging economy/4th Industrial Revolution? It's not so much the replacement of human labor by robots as the augmentation of human skills with technology, and the focus on a simple but profound source of value creation: what's scarce and in high demand? What's abundant and not in demand?

The point of my book is to lay out a pathway of learning how to learn on our own and acquiring the soft skills needed to collaborate, communicate and manage teams/projects effectively, regardless of the field of endeavor.

How can we expect young students with little life experience to choose wisely when they don't even understand how the economy works? The current education-career maze assumes that some basic math and science knowledge is all students need to figure out their role in a fast-changing economy that they don't even understand.

The inadequacy of our crazy-making education-career maze boggles the mind.We need to do much, much better, not just for our students but for our society. The answer is not another $1 trillion in student loan debt to pay for another raft of declining-value credentials. We need a new system, and fast. Solutions abound, but not within the current crazy-making education-career maze.

Here's a snapshot of the workforce's education level:

Even the most credentialed workers' earnings have stagnated:

And here's your wunnerful federal government, enforcing debt-serfdom on college students to maximize the profits of the student-loan racket:

Sunday, September 24, 2017

When the price of oil rises to the point of pain, just remember the handy-dandy discount mechanism: a much stronger US dollar.

Glance at this chart of the trade-weighted U.S. dollar, and note the swing highs and lows in the price of oil per barrel around each peak and trough. You can look up historical inflation-adjusted prices of oil in USD on this handy chart: Crude Oil Prices - 70 Year Historical Chart (macrotrends.net)

The correlation isn't perfect, of course. Oil was relatively cheap between 1986 and 2003, due to a relative abundance of supply as Saudi Arabia and new fields ramped up production, with two periods of extreme price action: a brief spike higher in 1990 preceding the First Gulf War, and a collapse to $17 in the 1998 Asian Contagion financial crisis.

Geopolitical crises, wars and supply shocks will move oil prices regardless of the value of the USD. That said, it's clear that absent such shocks, there is a strong correlation between a stronger USD and lower oil prices (in USD of course) and a weaker dollar and higher oil prices.

The reason why is straightforward: if the dollar gains purchasing power against other currencies, it buys more oil for each dollar.

Conversely, when the USD weakens, its purchasing power declines and it takes more USD to buy an imported barrel of oil.

(Note that the price of domestically produced oil is largely set on the global marketplace. West Texas crude oil may be a few dollars less per barrel than Brent crude oil, but if the global price skyrockets, so does the price of US-produced crude.)

Since oil and gas are the essential resources of the industrial economy, the price paid by consumers and commercial users matter.

The one way the US can get an across-the-board global discount on oil is to push the purchasing power of the USD higher. That is an enormous benefit that few commentators ever mention. Instead, pundits talk about the benefits of a weaker dollar, which boil down to lower priced exports.

Which matters most to households and enterprises? A tiny blip higher in exports (a relatively modest slice of the U.S. economy) or lower energy prices at the pump?

If a recession were to pressure household budgets, the one sure way to lower household spending on oil/gasoline would be to strengthen the USD.

There are two basic mechanisms that strengthen the USD: raise interest rates, so global capital flows to USD-denominated debt to earn the higher yield, or a global financial crisis which causes global capital to seek the relative safe haven of the USD.

In a global crisis, liquidity and credit will dry up, and all those non-US debtors holding the $11 trillion in USD-denominated debt I mentioned on Friday will be scrambling for USD to service their debts. This will also increase demand for USD, pushing the USD higher.

The Federal Reserve insists that yields must remain near-zero or the economy will collapse. Americans paying 15% to 23% interest on their credit cards haven't seen any benefit from near-zero rates, nor have student-loan debtors. The real beneficiaries of low yields are financiers, banks and corporations which borrow immense sums for next to nothing. (Try finding a credit card with a 1% or 2% interest rate.)

At some point, the price of oil might start mattering to households and businesses. Note that the discoveries of oil are now a thin slice of annual consumption. As the cheap oil is depleted, what's left is the costlier-to-extract stuff.

Even more alarming, the global supply of oil might fall well below global demand, and stay there.

When the price of oil rises to the point of pain, just remember the handy-dandy discount mechanism: a much stronger US dollar.

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